Inequality: Why Australia must not follow the US

Joseph Stiglitz

There is growing concern about inequality, and rightly so. There is growing inequality in most countries - marked increases in some, with more and more of each nation’s income going to the top, more people in poverty, and a hollowing out of the middle class. But the fact that there is so much more inequality in some countries than others means that the degree of inequality is not just a matter of economics; it is the result of policies and politics. Each confronts the same laws of economics, the same global economic forces; but how they respond differs markedly.

In the past few years, there has been a fundamental shift in our understanding not only of the causes of inequality, but also of the consequences. There are two ways to do “well”: to increase the size of the economic pie, and be justly rewarded for doing so; and to seize a larger share of the nation’s economic pie. The former is called wealth creation; the latter wealth appropriation or rent seeking. There is a growing consensus that an increasing share of inequality at the top arises from rent seeking - whether it takes the form of the exercise of monopoly power, taking advantage of deficiencies in corporate governance to seize an increasing share of corporate revenues, or using political power to get public resources at low prices or sell government goods and services at inflated prices.

But such rent seeking erodes economic performance. It’s one of the reasons that countries with greater inequality grow more slowly and have more instability - countries pay a high price for inequality, as the IMF has been emphasising in recent years.

Australia is not the best country in achieving shared prosperity, but neither is it the worse. Its pre-tax and transfer inequality or its post tax and transfer inequality are neither among the best among the advanced countries nor the worst. By the standard measures, it does neither the best nor the worse in “correcting” the before tax and transfer inequality.

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While the US (like Australia) prides itself on doing things bigger and better than elsewhere, its achievement in creating the highest level of inequality among the advanced countries is not something to be boastful about - or for others to emulate. As we look around the world, those countries that have most closely followed the American model have similar results - high levels of inequality.

While there are many dimensions to growing inequality, perhaps the most invidious is inequality of opportunity. Western democracies pride themselves in providing a level playing field, in which all who would work hard can prosper. But it’s a myth, and nowhere more so than in the US, in spite of the rhetoric about the American dream. The life prospects of a young American are more dependent on the income and education of his parents than is the case in other advanced countries. And there is a vicious circle: inequality of outcomes leads to inequality of opportunity which leads to further inequalities of outcome. The prospect for America’s future is thus still more inequality of outcomes and opportunity.

Some in Australia talk about emulating the American model. To be honest, while there are many great aspects of my country, our economy has not been performing particularly well - consistent with the earlier observation that economies with greater inequality don’t. Indeed, the American economic model has not been delivering for most of its citizens - income in the middle is lower than it was a quarter century ago; the median income of a full-time male worker is lower than it was four decades ago; the minimum wage has stagnated for half a century. This contrasts markedly with Australia, where median household income has grown at an average annual rate of 3.3 per cent, almost twice the Organisation for Economic Co-operation and Development average of 1.7 per cent - and much, much better than the US.

There are several areas where Australia should be particularly cautious about imitating the US model. One of the reasons that the US has gone to the bottom of the league tables in economic opportunity is our education system, and especially the way higher education is financed. It is one of the reasons that only about 8 per cent of those in the bottom half get a college education. Australia’s income contingent loan program, HECS, is the envy of the rest of the world. It works. The best US universities are superb - the best in the world - but they are all either state financed or non-profits, supported by generous philanthropy. They compete vigorously in quality - but it is not conventional market competition, where price plays a pivotal role. The under-regulated for-profit universities excel - in exploiting children from poor families and in lobbying to make sure that they can continue to do so.

Another area in which Australia leads, and America fails, is health. The American mostly private health care system is probably the least efficient in the world - spending twice the percentage of GDP of Australia, with much poorer results, exemplified by a life expectancy that’s three years shorter. The country is perhaps the only in the advanced world not to recognise the right to access to healthcare, with the result that inequalities in health outcomes are enormous.

A third area where America trails is basic welfare support and systems of social protection. With almost one out of four children living in poverty, and with deficient public support, the prospects for their future are not rosy - and this will inevitably translate into weaker overall economic performance for the country. The combination of unequal education opportunities and access to healthcare and inadequate systems of social protection translates into poor average performance of our children - well below the average of the advanced countries in standardised tests, in contrast to Australia, whose children perform well above average. Contrary to what some in Australia’s government have suggested, support for poor families is not only a moral imperative, it is an investment in the country’s future.

Two big lessons of economic research over the past 10 years are that inequality is not the result of inexorable laws of economics but rather of policy; and that countries that adopt policies that lead to high inequality pay a high price - inequality not only leads to a divided society and undermines democracy, but it weakens economic performance. Hopefully, as Australia debates its new government’s budget and economic “reforms,” it bears this in mind.

Joseph Stiglitz is the winner of the 2001 Nobel Memorial Prize in Economics. He is a former chairman of President Clinton’s Council of Economic Advisers and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers Our Future.

189 comments

The main method of the advocates of these inequitable style policies is to get the citizens blaming each other or some other ridiculous 'other' such as asylum seekers or illegal immigrants for whatever is wrong in their lives. On an inequitable social ladder everything is the fault of whoever is below you not who is above you. Meanwhile whoever is above you is intent on ripping you off and looking after themselves in order to catch up to whoever is above them. Fantastic system. Hence we have 'leaners', 'illegals', ''bludgers', 'lefties', 'scammers', 'whingers', 'the entitled' and every other form of supposed loser vilified by the likes of our current government. Unfortunately the insecure, isolated and just plain stupid are easily swayed into this way of thinking.

Commenter

GOV

Location

Sydney

Date and time

July 07, 2014, 3:23AM

I would add that - for greater fairness - it is essential to address our budget deficit and national debt challenge. Leading economists Chris Richardson (Deloitte Access Economics), and the University of Melbourne’s Ross Garnaut have recently warned that Australia faces a sharp fall in living standards growth.Richardson said, “the lesson for Australia is productivity or bust” and “growth in our living standards will halve”. Of the debate on national reform, he lamented, “You look at the conversation today and it terrifies me.”Garnaut said that Richardson’s predictions might be optimistic - and reinforced the need for improved productivity. He said, “I regret to say that changes in the contemporary political culture will be necessary to deliver productivity-enhancing reform.”That we have a serious budget problem was acknowledged by John Daley, head of the Grattan Institute; he said the current settings (even after the Hockey budget), “are not sustainable in the long run”.Daley said the budget had both “a revenue and a spending problem”. He opined the biggest single driver of escalating costs was healthcare - but, welfare outlays were contained. Daley’s view was the main adjustment in the budget is not spending cuts but tax increases, notably “bracket creep” (people pushed into higher tax rates). It will create an income tax problem. He said more structural policy decisions will be essential and there are only hard political options left.Richardson said, “The budget isn’t in crisis but it is in need of much more repair than many realise” and politicians on both sides need to "lead the repair job”. To address our fiscal reality - not deny it - surely helps to advance 'equity and fairness'.

Commenter

Howe Synnott

Location

Sydney

Date and time

July 07, 2014, 6:40AM

You would replace blaming the social strata below you on this 'inequitable social ladder' with blaming all of society's ills on the strata above you?

Actually I agree with the points Stiglitz raised about health and education. The last thing we want is a US style healthcare system as it is the most inefficient model around, and availability of education is vital to maintaining freedom of opportunity.

I do however think there is room for welfare reform in this country without degrading our social safety net. I think his claim that "one out of four children" in the US is living in poverty is a ludicrous statistic that ought to raise eyebrows if anyone stopped to think about it, and points to an ideological basis behind his argument. One needs to differentiate between absolute poverty, like in sub-Saharan Africa, and the type of poverty seen in the West, which is relative poverty. As a relative term, the 'poverty line' is an artificial construct. Tell me: how many people in Australia die of malnutrition, inability to access clean drinking water or basic medical care, or exposure to the elements each year?

There will always be the haves and have nots in any society, but in a land where you can get your full daily requirement of calories from McDonalds for $5 do we truly have real poverty?

Commenter

Spaniel

Date and time

July 07, 2014, 6:41AM

There's another favorite scapegoat of the pro-inequality brigade, and that is government itself. Because democratic government is the ultimate in sharing - values, resources, plans on behalf of the common welfare. The inequalities don't like that sort of thing.

Commenter

Common Wealth

Date and time

July 07, 2014, 6:56AM

oddly enough, the dis-education promoted by the right results in more people on welfare. It arises because the economy since 1990 has been demanding skilled labour, not unskilled process workers and factory workers.

The low skilled don't get jobs even as the minimum rate drops. They become long term unemployed and move to areas with low rents and still fewer jobs. Of course, they find their way onto welfare.

with a bigger welfare group (unemployed, faux disabled, gaols, etc) we end up with 20-25% on welfare.

Then the rich complain about the bludgers and welfare. So they cry out for "income tax reform" to flatten the scales so they don't pay as much. So the govt gives income tax cuts and introduces flat taxes (GST).

Still doesn't help, because now the poor have to be compensated with higher welfare. Around and around it goes, all the time education gets worse and more unskilled labour is produced and the minimum wage drops still further to absorb the unskilled, but who wants an unskilled when you can get semi-skilled for the same money?

Around and around - the skilled 20% become fewer because less people are trained, and skilled labour is imported. And lets face it, you don't need many skilled people for a collection of mines (just some Bankers and mergers and accountants).

Then the economy slumps, because 25-30% of consumers are on welfare, they can't afford housing, and tax receipts go down. Suddenly there's a budget crisis, which translates to "the rich are paying too much tax" and a right wing hero rides along and cuts the welfare from the non-working unskilled poor, preventing them from access education, health and govt benefits (like superannuation)

Its a death spiral, all right.

Commenter

Axis

Date and time

July 07, 2014, 7:21AM

"Unfortunately the insecure, isolated and just plain stupid are easily swayed into this way of thinking."....Yes they are GOV.... Watching the anti budget rally was funny. Those people are all left wing and have caused exactly what's going on in Australia right now. Missing so much of the big picture it's ridiculous. They talk about fairness and equity while missing everything that's causing a system that under the circumstances cannot be anything but unfair...Time for the left to grow up, stand back and try and work out what's going on. Really....With the "smartest" people embracing left wing politics, we're going to be entirely broke very soon. Let's see how your fair system works then.

Commenter

JohnBB

Date and time

July 07, 2014, 7:55AM

If this was a school report the US would be held back to repeat the year. Woeful results and they have the gall to look down their noses at the rest of the world. In Australia it's only 2 and bit years to go before we can kick this mob out!

Commenter

eyeroll

Location

Sydney

Date and time

July 07, 2014, 7:56AM

hi Spaniel - there is an illustrative article in this paper on the Kafkaesque treatment of those in need. The welfare reform that we seem to need is the opposite of that proposed by the current government.

Commenter

Ross

Location

MALLABULA

Date and time

July 07, 2014, 8:19AM

It was sold as 'individualism' and it clearly does not work. The government (or vested interest) sells whatever notion it can, to any level available, that there is always someone that they can 'kick-down' (on some form of abstract ladder). The different people highlighted within GOV's post above are an excellent example. It pits one individual against another and therefore, actively destroys any sense of 'community' or any common goals that would benefit a number of people.It is divisive and it is used in politics for a reason. To divide and conquer. The more the government of the day gets this 'anti-community' ideology through to the people, the more it has control over them. The Abbott / LNP actively uses this ideology.

Commenter

Jump

Date and time

July 07, 2014, 8:21AM

Okay. Here's the solution. Populate at the rate of 500k in 13 months. We'll blow the rest of Australia's wealth this generation and the kids on the shoulders of the guys at the rally can deal with it. Good plan hey? Endorsed by the genius left and right. Be funny if it weren't so ridiculous and tragic.